And Now For the Hard Part: Markets Ready for Gridlock

By Brendan Conway

As of a few minutes ago, the networks have projected President Obama’s re-election. The Republicans control the House of Representatives for another two years. Now what? the market asks. The worry: Impasse. Fiscal cliff. Gridlock. Downgrades. Trouble.

You get a wisp of that sentiment bubbling up from overnight trading. Futures on the Dow Jones Industrial Average (DIA) are down 81 at this writing, while Standard & Poor’s 500-stock index (SPY) futures are down 10. Those moves erase part of the blue-chip Dow’s Tuesday gains, and most of the S&P 500′s. Asian indexes are mostly lower, with Hong Kong’s Hang Seng down 0.4% and Japan’s Nikkei index off similarly.

Will House Speaker John Boehner feel empowered to block any effort at tax increases as part of a “bridge” across the fiscal cliff? Will President Obama allow defense spending to be cut, and dividend taxes to triple for wealthy households? Will a ratings firm such as Moody’s take preemptive action by downgrading the U.S. credit rating if politicians dally? These are the sort of questions that will be asked more frequently.

From the WSJ tonight, before the presidential race was called:

A status quo election could strengthen House Speaker John Boehner’s hand as Republicans pivot to the lame-duck session and a wrenching set of decisions over tax and spending issues at the end of the year–the so-called fiscal cliff. The Ohio Republican’s ability to hold House Republicans together–particularly if Mr. Obama is re-elected–will be crucial in negotiating with Democrats.

The fiscal cliff would slice about 3% from GDP, which is growing about 4% in nominal terms (2% in real terms and 2% inflation), and he notes both presidential candidates say they would seek a deferral of the scheduled tax hikes. Even Obama would be unlikely to let all of the Bush tax cuts expire and sequestration of spending also would likely be delayed temporarily.

But the task facing Washington is a tough one, Wien says. “There is no way we can bring down the enormous annual U.S. deficit without both cutting expenditures (24% of GDP) and also raising taxes (17% of GDP). We are facing a potential crisis and Washington will have to respond to that challenge. I think a workable compromise will be reached no matter who wins the presidential election, but there is likely to be some negative impact on growth next year even so.”

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Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.